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3 Different Methods to Prioritize Your Debt Payoff

Being in debt sucks. It take a toll on your emotional well-being, and sometimes your physical well-being too. When people finally decide they are tired of being in debt, they often was to find the fastest way possible to get out of debt once and for all. But where should they start?

There are several different debt payoff methods to consider when you are trying to get out of debt and it can be confusing trying to decide between them. Here are 3 of the most popular debt payoff strategies, along with their pros and cons, so you can decide for yourself which method is right for you.

Debt Snowball

The debt snowball became popular through the work of financial guru and author, Dave Ramsey. Ramsey suggests paying off debts in order of smallest to largest total balance, while ignoring their interest rates. His reasoning is simple, the faster you can pay off the smallest balances the faster you’ll see progress. Progress is what keeps people going while they are fighting to get out of debt.

After a balance is paid off, the amount of that minimum payment is then combined with the minimum payment of the next debt on the list until it’s paid off too. Then when you attack the third debt on the list you’ll be paying the minimum payment on it plus the total of the minimum payments of the first two debts you already eliminated. Thus, the snowball keeps growing until you are out of debt.

Debt Avalanche

Another way to prioritize your debt payoff is to order your debts by their interest rates instead of their balances. This method will actually save you more money in interest charges than the debt snowball method. But if your largest interest rate is also your largest debt balance, it could be a while before you see any debts paid off from your hard work. Once you pay a debt off, you’ll still roll that minimum payment onto the next debt on your list just like the debt snowball, so your progress will still get faster over time.

But the debt avalanche is not always the most popular choice because it can take so long to get the first debt paid off, eliminating the quick psychological win that people usually get from the debt snowball.

Debt Tsunami

The debt tsunami is usually the least heard of option out of these three different methods to prioritize your debt payoff, but some people subscribe to it without even realizing it has a name. The debt tsunami is based on your emotional ties to your debt. With this method you focus on paying off the debt that you hate the most. This could mean paying off a loan to a family member first, even if it’s a 0% interest, simply because you will feel better emotionally knowing this debt has been erased from your list.

Humans are emotional and psychological creatures, so the two methods people usually prefer are the debt snowball or the debt tsunami even though the debt avalanche will usually result in them saving the most money.